What Taxes Do You Pay on a Personal Injury Award or Settlement

[Chuck77]

Because the plaintiff's lawyer, as agent for the plaintiff, requests the check be made out jointly to the lawyer and the plaintiff. And the defendant does not care so long as the joint check satisfies the settlement or judgment. But the defendant has no obligation to the lawyer that it is satisfying by making the check payable jointly to the lawyer and the plaintiff.

If the check is made out to both, the lawyer likely does not need the client to endorse it. Nor does the client have any control over it.

Any time that the obligation is owed to you but you direct the obligor to pay to someone else on your behalf. This happens all the time. You'd do that for your own convenience, but the fact that the check does not have your name on it does not mean it is not income to you. While you don't get the cash in hand, you are exerting control over it nevertheless by directing where the money goes.

Really? Name two instances please.

But the reason it is tax free is because there a particular code section — IRC § 106 — that exempts that from the employee's income. Without that specific exemption in the code, the same principle that I mentioned above would apply: it would be income to the employee even though the check is going the health insurance company rather than the employee directly.

Is there also a "code" for not taxing an employee for his personal use of a company car?

An employee not paying income tax on his healthcare while an individual does is a sham. It should be a write-off for both.

I and many others would say that health insurance is a necessity, not a luxury. Indeed, Congress thought that too when it passed the Affordable Care Act (ACA) and required everyone to be covered by some form of health insurance.

Healthcare is not a necessity. Air, water, clothes, a car, Medicare etc are far more necessities than health insurance. It is just an insurance policy on protecting your net worth incase of a rare catastrophic accident. Who needs insurance to cover penicillin or a fiberglass cast? I've had insurance my whole life and have never needed it. As for ACA, it was a scam to pad the pockets of the "Big Three" (healthcare providers, health insurance and big pharma). I just had about $13,000 of medical bills. My insurance paid less than $2,000 of it. Ya, great necessity. Thanks Obama! Also, folks are still not insured because individual health insurance went up 500%.

The defendant owes to the plaintiff whatever the judgment or settlement was for the damages incurred. The details of what the plaintiff actually ends up paying is immaterial. The reason that medical providers are willing to settle for less is that they know there is a limited pot from which bills can be paid, and they take what they can get while they can. The defendant does not get to escape its responsibility to pay for all the damages incurred simply because the plaintiff then settles with the medical providers later for less. In short, the defendant has no cause to complain that the medical providers in the end will take less.

If it were up to me, I'd let the insurance company retrieve their own money through their own lawsuit and legal bills. Of course they will take less, they don't deserve a dime from the efforts of the plaintiff's lawyer. But the plaintiff's lawyer will take half of everything so he wants the settlement as high as possible. No wonder they work on contingency, they chase money that the plaintiff will never see.

Spam Reported

Funny, the stuff you post is way, way worse.

Report yourself next time.

[Taxing Matters]

If the check is made out to both, the lawyer likely does not need the client to endorse it. Nor does the client have any control over it.

It's not the lawyer's money. It's the client's the money. And the fact that the lawyer takes the check and does the disbursement is all done pursuant to the fee agreement the lawyer has the with the client. So the client agreed to that. Nothing about this changes the fact that the entire award is included in the plaintiff's income for the reasons I've already stated. You can keep trying to spin different variations of the same theme where the lawyer gets the check and it's not going to change the answer.

Really? Name two instances please.

I'll give you four examples, apart from the one we've been discussing, that are very common and happen literally thousands of times (at least) every single business day.

1. Amy rents an apartment from Brad, who owns the apartment building. Brad contracts for ABC property management company to manage the place and collect rent from the tenants. ABC directs the tenants to write the checks to ABC property management company. ABC then deducts its fee and managements expenses and send the rest to Brad. The fact that ABC gets the check for the rent does not make it ABC's money. It is acting as the agent for Brad, and the entire rent belongs to him. Under the principle I outlined earlier, the entire $1500 of rent Amy pays is income to Brad even though he didn't get the check.

2. Carol owes money to DEF corporation that she's defaulted on. After several dunning letters, DEF contracts with Deadbeat Collection Agency (DCA) to collect the debt on its behalf. (Note this is not a sale of the debt, simply a contract for collection.) DCA contacts Carol and gets her to make a payment of $100 on the debt and tells her to make the check out to DCA. DCA then deducts it's commission and send the rest to DEF. The entire $100 DCA collects for DEF belongs to DEF and is income to DEF even though DEF did not get the check for it.

3. David visits the doctor and incurs a bill of $500. The medical practice hires XYZ Financial to handle all the billing. The bill goes out to David with instructions for the check to be to XYZ. XYZ gets the check, deducts its fee, and forwards the rest to the medical practice. The entire $500 fee is income to the doctor. It's his income even though he didn't get the check from David.

4. Eric buys a table from Elder Pine Works, a company that has a store front on Amazon (or Ebay or whatever other platform) for $250. The payment goes to Amazon, which then deducts its fee and forwards the balance to Elder Pine. The entire $250 price of the table is income to Elder Pine even though it didn't get Eric's payment directly.

And I could come up with more, but you hopefully get the idea. This happens all the time. So the situation with the attorney on contingent fee is hardly unique or novel.

Is there also a "code" for not taxing an employee for his personal use of a company car?

Yes, there is. IRC § 132, which provides the rules for qualified fringe benefits.

An employee not paying income tax on his healthcare while an individual does is a sham. It should be a write-off for both.

A person who pays for his/her own health insurance does get to deduct that as an itemized deduction as part of the deduction for medical expenses. It is subject to some limitations, notably that only the portion of the expenses that exceeds 7.5% of your adjusted gross income (AGI) is deductible. Suppose that Becky has medical expenses, including health insurance, of $10,000 for the year and her AGI is $50,000. 7.5% of $50,000 = $3,750. She can therefore deduct $10,000 - $ 3,750 = $6,250 of medical expenses on her return.

Certainly that is not as good as the exclusion the employee gets. Congress gave the better exclusion for employees to encourage employers to offer health insurance plans. You apparently disagree with the choice Congress made, and I'm sympathetic to you on that one, but if you want that changed Congress where you need to go for that.

Healthcare is not a necessity.

Really? Heathcare is not a necessity? I would say it's more of a necessity than a car. If I were having a heart attack, I'd say prompt health care was indeed the most necessary thing in the world. You don't agree?

Air, water, clothes, a car, Medicare etc are far more necessities than health insurance.

You do realize that Medicare is a type of health insurance too, right? It's just provided by the government rather than a private company.

[Chuck77]

It's not the lawyer's money. It's the client's the money. And the fact that the lawyer takes the check and does the disbursement is all done pursuant to the fee agreement the lawyer has the with the client. So the client agreed to that. Nothing about this changes the fact that the entire award is included in the plaintiff's income for the reasons I've already stated. You can keep trying to spin different variations of the same theme where the lawyer gets the check and it's not going to change the answer.

If there is one thing I have learned about lawyers in my recent deposition is that you must be very cognizant of the words they use, and your words are off a bit.

Lawyers very, very rarely retrieve "income" for their clients. That is only done as a result of punitive damages. Since only 3% of personal injury cases go to court and let's say only 10% of those cases level punitive damages against the defendant, less that 1% of personal injury cases ever result in paying income to the plaintiff. So 99% of the time a lawyer is NOT disbursing income.

I'll give you four examples, apart from the one we've been discussing, that are very common and happen literally thousands of times (at least) every single business day.

1. Amy rents an apartment from Brad, who owns the apartment building. Brad contracts for ABC property management company to manage the place and collect rent from the tenants. ABC directs the tenants to write the checks to ABC property management company. ABC then deducts its fee and managements expenses and send the rest to Brad. The fact that ABC gets the check for the rent does not make it ABC's money. It is acting as the agent for Brad, and the entire rent belongs to him. Under the principle I outlined earlier, the entire $1500 of rent Amy pays is income to Brad even though he didn't get the check.

2. Carol owes money to DEF corporation that she's defaulted on. After several dunning letters, DEF contracts with Deadbeat Collection Agency (DCA) to collect the debt on its behalf. (Note this is not a sale of the debt, simply a contract for collection.) DCA contacts Carol and gets her to make a payment of $100 on the debt and tells her to make the check out to DCA. DCA then deducts it's commission and send the rest to DEF. The entire $100 DCA collects for DEF belongs to DEF and is income to DEF even though DEF did not get the check for it.

3. David visits the doctor and incurs a bill of $500. The medical practice hires XYZ Financial to handle all the billing. The bill goes out to David with instructions for the check to be to XYZ. XYZ gets the check, deducts its fee, and forwards the rest to the medical practice. The entire $500 fee is income to the doctor. It's his income even though he didn't get the check from David.

4. Eric buys a table from Elder Pine Works, a company that has a store front on Amazon (or Ebay or whatever other platform) for $250. The payment goes to Amazon, which then deducts its fee and forwards the balance to Elder Pine. The entire $250 price of the table is income to Elder Pine even though it didn't get Eric's payment directly.

And I could come up with more, but you hopefully get the idea. This happens all the time. So the situation with the attorney on contingent fee is hardly unique or novel.

We were talking about a lawyer, or others, dispersing income. None of those examples represent others doing that for another person.

Yes, there is. IRC § 132, which provides the rules for qualified fringe benefits.

A law does not make something right. It makes it legal.

A person who pays for his/her own health insurance does get to deduct that as an itemized deduction as part of the deduction for medical expenses. It is subject to some limitations, notably that only the portion of the expenses that exceeds 7.5% of your adjusted gross income (AGI) is deductible. Suppose that Becky has medical expenses, including health insurance, of $10,000 for the year and her AGI is $50,000. 7.5% of $50,000 = $3,750. She can therefore deduct $10,000 - $ 3,750 = $6,250 of medical expenses on her return.

Your numbers are stacked. Try doing it for a more real number, like when a dual income that makes $150K/yr. They would get no deduction.

Certainly that is not as good as the exclusion the employee gets. Congress gave the better exclusion for employees to encourage employers to offer health insurance plans. You apparently disagree with the choice Congress made, and I'm sympathetic to you on that one, but if you want that changed Congress where you need to go for that.

You are sympathetic to me? Try looking at if from a non-employee standpoint. They pay 400% more for their health insurance, and unless they are self-employed, they get zero deduction for those obscene monthly payments. Great for the employee but a royal screw job for everyone else, who nobody cares about because there aren't enough of them.

Really? Heathcare is not a necessity? I would say it's more of a necessity than a car. If I were having a heart attack, I'd say prompt health care was indeed the most necessary thing in the world. You don't agree?

I believe that it is so fundamental that we should all pay the same for it, like our federal tax code, like we pay for SS or Medicare. Also, it has nothing to do with running a business so it should not be a legitimate write off for a business. Either everyone pays tax on medical coverage or nobody does.

You do realize that Medicare is a type of health insurance too, right? It's just provided by the government rather than a private company.

I said Medicare because those folks have limited income, can often no longer work for an income, have limited assets and are the most medically needy. So they need to either be taken care of with Medicare, handed over to the state/fed to pay for them or be thrown in a ditch to die.

[Taxing Matters]

If there is one thing I have learned about lawyers in my recent deposition is that you must be very cognizant of the words they use, and your words are off a bit.

Lawyers very, very rarely retrieve "income" for their clients. That is only done as a result of punitive damages. Since only 3% of personal injury cases go to court and let's say only 10% of those cases level punitive damages against the defendant, less that 1% of personal injury cases ever result in paying income to the plaintiff. So 99% of the time a lawyer is NOT disbursing income.

I did indeed choose my words carefully, and I was not, to use your phrase, "off a bit". The money received by the client, even in the case compensation of personal injury, is income. It is just not taxable income. In the case of compensatory damages for personal injury it is not taxable income, but it is still income nevertheless.

We were talking about a lawyer, or others, dispersing income. None of those examples represent others doing that for another person.

All of those examples are exactly that situation. For example, the personal property manager collecting rent for the landlord. That rent is income for the landlord. But tenant doesn't pay the landlord her $1500 rent directly. Instead the tenant the pays the property management firm. The property management firm deducts its fee and sends the rest to the landlord. The entire $1500 rent is income to landlord even though the landlord didn't get the rent check. The plaintiff's lawyer on a contingent fee case receives a check from the defendant for $100,000 to satisfy the judgment against it. The plaintiff's lawyer deducts his contingent fee and then sends the rest to the client. But the entire $100,000 is income to the client even though the client didn't directly get the check (whether the income is taxable is another matter, as discussed above). It's the same situation and both are examples of the concept we have been discussing: it is not who gets the check that matters, but rather who was owed the money and is controlling what happens to it. In both these cases the property management company and attorney are acting as agents for their clients; they are receiving money that is owed their clients. Their clients are directing what happens with that money via the contract they have with the landlord or lawyer. So in both cases the clients have income in the full amount of the check that their agent's received for them. If you can't see that from a tax standpoint the situations are the same I don't know what to tell you.

A law does not make something right. It makes it legal.

You asked if there was a code section that provided for it, and I gave you the answer. Your statement is correct as far as it goes, but if you have an objection to fringe benefits the reason for the objection certainly isn't obvious. In any event this thread is not the place to debate whether every section of the tax code is right or wrong.

Your numbers are stacked. Try doing it for a more real number, like when a dual income that makes $150K/yr. They would get no deduction.

My example was actually a real one (though with rounded numbers). You can of course come up with situations in which there would be no deduction. My point was that in some instances there is a deduction available but also agreeing with you that it is not nearly as good as the benefit the employee gets with employer provided health insurance.

You are sympathetic to me? Try looking at if from a non-employee standpoint. They pay 400% more for their health insurance, and unless they are self-employed, they get zero deduction for those obscene monthly payments. Great for the employee but a royal screw job for everyone else, who nobody cares about because there aren't enough of them.

I do look at it from a non-employee standpoint because I myself have not been an employee for a number of years. I'm keenly aware that I pay far more for my health insurance now than I did when I worked for the government and that the governments contribution (which was about 80% of the cost) was not income to me. It was a great deal. It'd be great if everyone had similar access to very affordable health insurance.

I believe that it is so fundamental that we should all pay the same for it, like our federal tax code, like we pay for SS or Medicare. Also, it has nothing to do with running a business so it should not be a legitimate write off for a business. Either everyone pays tax on medical coverage or nobody does.

Well, you had said earlier that healthcare was not a necessity. Now your views are much closer to mine regarding the necessity of health care.

[Chuck77]

Nearly every definition of income makes that word synonymous with gain. You had a different definition of the word when you said "the governments contribution (which was about 80% of the cost) was not income to me." Income being synonymous with it being taxable. Even the IRS does not want a personal injury award to be listed as income on your taxes. So is it "income?" Not to the IRS!

If I bought a piano for $500 and sold it the next day for $500, is that money income? Maybe yes. When someone takes my right arm and they pay me $500K for it, it is an even exchange, no gain, no income. if the $500K for my right arm was taxable, then it would be logical that losing an arm, and not being compensated fully for it, would allow for a huge write-off. But one cannot gain, create income, or write off lost and injured body parts.

[Taxing Matters]

Nearly every definition of income makes that word synonymous with gain. You had a different definition of the word when you said "the governments contribution (which was about 80% of the cost) was not income to me." Income being synonymous with it being taxable. Even the IRS does not want a personal injury award to be listed as income on your taxes. So is it "income?" Not to the IRS!

If I bought a piano for $500 and sold it the next day for $500, is that money income? Maybe yes. When someone takes my right arm and they pay me $500K for it, it is an even exchange, no gain, no income. if the $500K for my right arm was taxable, then it would be logical that losing an arm, and not being compensated fully for it, would allow for a huge write-off. But one cannot gain, create income, or write off lost and injured body parts.

The definition of gross income in IRC § 61(a) is extremely broad. It provides that "Except as otherwise provided in this subtitle, gross income means all income from whatever source derived." Thus, anything of value you receive is gross income except to the extent the code excludes it. For that reason, compensatory damages from a personal injury award would be part of your gross income for income tax except for the fact that it is expressly excluded from gross income by IRC § 104(a)(2). It has nothing to do with any concept of gain or loss from the loss of body part. The money you get in the lawsuit is not for the defendant purchasing your missing body part but rather is compensation for the losses you suffer as a result of not having that body part any more, i.e. lesser mobility and greater difficulty doing various tasks, loss of income related to the inability to use that body part in your job, etc. It is not treated a sale of the body part.

As for your piano example, the $500 you receive in the sale is included in gross income, but to figure your taxable income from it you get to deduct your basis in the piano that you sold. Your basis in this case is the price you paid for it, $500. So the amount that is subject to tax ends up being zero. Capital gains computations are not about how much you get compared to the fair market value of the item you are selling. It is about what you get relative to your basis in the item. In your example the basis was the same as the value of the piano but of course in most circumstances it's not. The basis is either more or less than what you received in the sale.

So even if the compensation for the lost body part was treated like a sale, all the money you got would be income if not for the exclusion in IRC § 104(a)(2). Why? Because you have no basis in that body part to reduce the amount of the income subject to tax. You didn't pay God for it.

[Chuck77]

The definition of gross income in IRC § 61(a) is extremely broad. It provides that "Except as otherwise provided in this subtitle, gross income means all income from whatever source derived." Thus, anything of value you receive is gross income except to the extent the code excludes it. For that reason, compensatory damages from a personal injury award would be part of your gross income for income tax except for the fact that it is expressly excluded from gross income by IRC § 104(a)(2). It has nothing to do with any concept of gain or loss from the loss of body part. The money you get in the lawsuit is not for the defendant purchasing your missing body part but rather is compensation for the losses you suffer as a result of not having that body part any more, i.e. lesser mobility and greater difficulty doing various tasks, loss of income related to the inability to use that body part in your job, etc. It is not treated a sale of the body part.

As for your piano example, the $500 you receive in the sale is included in gross income, but to figure your taxable income from it you get to deduct your basis in the piano that you sold. Your basis in this case is the price you paid for it, $500. So the amount that is subject to tax ends up being zero. Capital gains computations are not about how much you get compared to the fair market value of the item you are selling. It is about what you get relative to your basis in the item. In your example the basis was the same as the value of the piano but of course in most circumstances it's not. The basis is either more or less than what you received in the sale.

So even if the compensation for the lost body part was treated like a sale, all the money you got would be income if not for the exclusion in IRC § 104(a)(2). Why? Because you have no basis in that body part to reduce the amount of the income subject to tax. You didn't pay God for it.

The word income is used in the definition of the word income? Really? Then it can be assumed that the acquiring of a wife should be considered income too. The better the wife the higher the income value, thus being taxed on her too. Just attach a photo of her in your tax return, and one in her bikini, for an IRS valuation.

If a crime is not in the books or is punishable but someone finds it offensive, is it still a crime? If income is not considered income, is it still income?

Your right, the word is too broad and should not be used. To me the word income refers to taxable or gain which is accurate for my purpose of the word. Also the IRS has established with their practiced auditing what income is. If they do not find folks who sell a used car, and not include it in their taxes, as tax cheats, then we can assume that money is not income.

[Taxing Matters]

Your right, the word is too broad and should not be used. To me the word income refers to taxable or gain which is accurate for my purpose of the word. Also the IRS has established with their practiced auditing what income is. If they do not find folks who sell a used car, and not include it in their taxes, as tax cheats, then we can assume that money is not income.

Your concept of income isn't the one the the law uses. You'd do well when doing your return to keep in mind the Code definition of gross income, not your view of what income is. Because income tax computation starts with gross income.

The reason that the IRS does not care about most sales used cars that were not used for business is not that the receipt of money from the sale is not gross income (it is) but because the basis the person has in the car exceeds the sale price received for it, thus resulting in zero taxable income. As a result, not including that sale on your return does not impact the tax you owe. Now, if there was a gain on the sale and thus tax to pay from it, the IRS would care. The IRS is, one the whole, a practical organization. It focuses its efforts on those things that increase collection of tax.

[Chuck77]

Your concept of income isn't the one the the law uses. You'd do well when doing your return to keep in mind the Code definition of gross income, not your view of what income is. Because income tax computation starts with gross income.

Why? I know very well what the IRS is interested in. It is you that wants to label injury compensation, the sale of a car and finding $20 on the ground as gross income, when the IRS does not. It is you that thinks you are not listing all your gross income on your taxes.

The reason that the IRS does not care about most sales used cars that were not used for business is not that the receipt of money from the sale is not gross income (it is) but because the basis the person has in the car exceeds the sale price received for it, thus resulting in zero taxable income. As a result, not including that sale on your return does not impact the tax you owe. Now, if there was a gain on the sale and thus tax to pay from it, the IRS would care. The IRS is, one the whole, a practical organization. It focuses its efforts on those things that increase collection of tax.

When you listen to lawyers and lawyers reciting law, you must listen to every word carefully. If selling a car and finding $20 on the ground generates gross income in the eyes of the IRS, then it would be accurate to say that very few people know their gross income at the end of the year.

[Taxing Matters]

Why? I know very well what the IRS is interested in. It is you that wants to label injury compensation, the sale of a car and finding $20 on the ground as gross income, when the IRS does not. It is you that thinks you are not listing all your gross income on your taxes.

The reason why is that once you understand what gross income is you won't overlook anything that you may need to include on your return. I know very well what the IRS considers gross income — the same thing the Code does because that is the law the IRS must apply. And the IRS does indeed use that very definition. How do I know? I was both an officer and attorney for the IRS for a number of years before going into private practice, and in my role as an IRS attorney I was in the national office in DC, and thus was one of the lawyers that write the regulations and advise the field agents on the law.

If selling a car and finding $20 on the ground generates gross income in the eyes of the IRS, then it would be accurate to say that very few people know their gross income at the end of the year.

Both are part of your gross income. And is it quite accurate to say that a lot of taxpayers do not fully appreciate everything that constitutes gross income, largely because, like you, they have their own inaccurate notions of income rather than actually having looked at the law.